Context

• India’s economic growth slowed to 6.5 percent during the July-September quarter because of a fading low-base effect. For the full year, the economy is expected to grow at 7 percent, with risks tilted to the downside. This implies that the second half of the year (October–March) will see growth slow down to 4.6 percent, again largely due to the base effect and slowing global growth.

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Background: The COVID Pandemic, geopolitical tensions and the Prospects

• This was the second consecutive quarter with no functional disruption of economic activity caused by the COVID-19 pandemic.
• Since October, Google, too, has stopped reporting mobility indicators, which had become one of the most tracked data points for analysts and policymakers since the pandemic struck.
• This suggests that COVID-19 is unlikely to come in the way of growth for most parts of the world, with China, which is following a zero-COVID policy, being the key exception.

Performance of Indian economy amidst the current global slowdown

• Spill over effect in India: In an interconnected world, Geopolitical tensions, high and broad-based inflation in many parts of the world and sharp increases in policy rates in developed countries amid a looming recession will continue to confront the global economy. These effects will spill over to India as well, despite its structural strengths.
• Slow growth of contact- intensive service sector: Growing at 14.7 per cent, contact-intensive services such as trade, hotels and transport continued to be key drivers of the growth momentum in the second quarter. This segment had borne the brunt of the pandemic because of recurrent lockdowns, and is showing a strong rebound because of pent-up demand, a trend that is likely to continue this year.
• Strong private consumption: Private consumption was quite strong in the second quarter, growing by 9.7 per cent, and now 11.2 per cent above the pre-pandemic level.
• Rising domestic demand, good for the economy: The resilience of domestic demand will shape the contours of GDP growth in coming quarters as the global growth momentum is anticipated to lose steam. Advanced economies, whose growth is expected to slow sharply next year, account for almost 45 per cent of India’s merchandise exports.
• Strong and firm Agriculture sector: Despite climate-related disturbances, agriculture surprisingly held its ground in the second quarter.
• Healthy tax revenue: So far, healthy tax revenue collections have allowed the government to finance its bloated subsidy bill and investments without much pressure on the fiscal deficit. Led by government capex, investments grew 10.4 per cent in the second quarter.
• Good corporate balance sheets: strong corporate balance sheets not only cushion them against global headwinds but also provide an opportunity to kick-start the investment cycle once uncertainty subsides.

The current status of India’s manufacturing growth

• Slowed growth: Manufacturing GDP growth slowed rather sharply due to the base effect and margin pressure on manufacturing companies. This is somewhat contradictory to the relatively strong signals from the Purchasing Managers’ Index (PMI) which, at 55.9, was in the expansion zone during the July-September quarter, while also being slower than the IIP growth of 1.4 per cent in the same quarter.
• Support from the government: Currently, manufacturing is finding some support from government spending on infrastructure, particularly in sectors such as steel and cement. The production-linked incentive scheme has incentivised private investment and fast-forwarded manufacturing investments in electronics and pharmaceuticals.
• Overall demand is low except few high value segments: The festive season-related production and the continued strong demand in the automobile sector (especially in high-value segments), was not enough to prevent an overall slide in manufacturing.

The current status of Agriculture sector

• Strong and firm Agriculture sector: Despite climate-related disturbances, agriculture surprisingly held its ground in the second quarter. Although rains were 6 per cent above normal this year, they were quite lopsided and led to a drop in rice acreage in some of the rice-growing regions on account of rainfall deficiency and some damage to crops from excess unseasonal rains in October.
• Inconsistency in rainfall may affect kharif: In fact, October rains were 47 per cent above the long-period average. Rain shortfall in some regions, excess in others, and unseasonal excess rains point towards some hit to kharif production.
• Rabi crops look in good swing: That said, the prospects for the winter crop (rabi crop), which is largely irrigated, look good owing to favourable soil moisture conditions and healthy reservoir levels. While rabi sowing was initially delayed on account of unseasonal October rains, it is now progressing well, with sown area until November 18 about 7 per cent higher than during the same period last year.
• Overall agriculture growth prospects: This trend, if sustained, should offset the hit to kharif production to some extent. Overall, we expect agriculture to grow at 3 per cent this year, lower than the decadal average of 3.8 per cent.
• Food inflation: Abnormal weather has also triggered food inflation, particularly in cereals, which will cool off only when the prospects for rabi crop become clear. While fall in inflation in October was largely due to a high base effect, core inflation continues to be sticky and food inflation risks persists.

Conclusion

• India’s growth cycle has become well-synchronized with those of advanced economies. So, a sharp slowdown in these countries will spill over to India and the maximum impact of domestic interest rate hikes on growth will play out next fiscal given that monetary policy impacts growth with a lag. The key policy challenge for India will be to manage a soft landing amid the possibility of a hard landing in advanced countries.

Mains question

Q. COVID pandemic disrupted the global economy, moreover the geopolitical tensions are adding to the existing slow growth. In this context, discuss the current status of Indian economy.

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